Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted) The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would:

Question

Parkside Inc.has several divisions that operate as decentralized profit centers.Parkside's Entertainment Division manufactures video arcade equipment using the products of two of Parkside's other divisions.The Plastics Division manufactures plastic components,one type that is made exclusively for the Entertainment Division,while other less complex components are sold to outside markets.The products of the Video Cards Division are sold in a competitive market;however,one video card model is also used by the Entertainment Division.The actual costs per unit used by the Entertainment Division follow: (CMA adapted)  The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market.The market price of the video card used by the Entertainment Division is $10.98 per unit.Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit.The Video Cards Division,having excess capacity,agrees to lower its transfer price to $8.70 per unit.This action would:

Quizplus · Accepted Answer

By lowering the transfer price, the Video Cards Division may experience a decrease in profit in the short term; however, it would benefit Parkside Inc. as a whole by optimizing the overall profit goals. The Entertainment Division would also benefit as they would be able to purchase the video cards at a lower cost and increase their own profit margin. By selling the proprietary plastic component at $6.25 per unit on the open market, the Plastics Division would also increase their profit margin. Overall, this decision would benefit all divisions and therefore optimize the overall profit goals of Parkside Inc.